Singh Shunned as Daiwa Buying Indonesia, KBC Favoring Brazil: India Credit

India is lagging behind Brazil and Russia in attracting debt investors as a lack of sovereign dollar issues and regulatory hurdles deter firms from Daiwa SB Investments to KBC Asset Management SA.

Indian debt attracted $419 million of net inflows from global, high-yield and emerging-market bond funds this year through Sept. 22, according to data compiled by EPFR Global, a research firm tracking companies managing $13 trillion in Cambridge, Massachusetts. That’s 1.4 percent of the $31 billion funneled into emerging-market bond funds. Brazilian debt lured $3.6 billion and Russia attracted $2.3 billion, the data show.

While record buying of Indian bonds this year led Prime Minister Manmohan Singh to raise the overseas investor limit by 50 percent to $30 billion on Sept. 23, regulators have yet to allocate individual debt quotas for international funds more than a week after the change. At the Securities and Exchange Board of India’s auction Aug. 12, the limit for each entity to buy government bonds was 1 billion rupees ($22 million) and 10 billion rupees for company debt.

“There isn’t enough liquidity in India’s bond market and they still have regulations, making us reluctant to buy,” said Kei Katayama, who helps oversee $53.2 billion as head of foreign fixed-income at Daiwa SB in Tokyo.

Daiwa SB says comparable yields and fewer rules make Indonesian securities more attractive, while Luxembourg-based KBC Asset Management favors Brazilian dollar bonds.

Yield Advantage

India’s 10-year local-currency government bonds yielded 7.847 percent, compared with 11.89 percent in Brazil, 7.59 percent in Indonesia, 7.38 percent in Russia and 3.32 percent in China, according to data compiled by Bloomberg. Similar debt offers 2.52 percent in the U.S. and 0.93 percent in Japan.

The difference in yields between India’s debt due in a decade and similar-maturity U.S. Treasuries widened to 532 basis points, or 5.32 percentage points, from 526 a week earlier. The spread, which has averaged 318 in the past decade, reached a two-year high of 556 on Aug. 26. The spread between Brazil’s 10- year dollar debt and Treasuries has narrowed to 119 from 150 in the past month.

The government’s decision to expand the quota triggered a rally in government bonds and the rupee.

Bond, Rupee Rally

India’s benchmark 10-year bonds rose every day after the government raised the cap on debt investment to post their first monthly gain since June, pushing yields to the lowest level in more than six weeks. Yields on 7.8 percent notes due in 2020 fell eight basis points last month, according to the central bank’s trading system.

India’s rupee appreciated 4.7 percent in September to 44.94 per dollar, the best performer in Asia after South Korea’s won.

Erste Sparinvest in Vienna said it will consider entering the Indian market after the policy changes.

“I like India as a fundamental story and there’s potential,” said Christian Gaier, who helps manage 1.33 billion euros ($1.8 billion) in emerging-market debt at Erste Sparinvest. “We are confident India will take more steps to open the market.”

India’s economy expanded 8.8 percent last quarter, the same pace as Brazil. Inflation slowed to an eight-month low of 8.5 percent in August after central bank Governor Duvvuri Subbarao raised benchmark interest rates five times since March. The government forecasts the budget deficit will drop to 5.5 percent of gross domestic product in the year to March 31 from 6.9 percent, the steepest cut in 19 years.

No Benchmark

India, which has no sovereign bonds denominated in dollars, euros or yen, isn’t included in JPMorgan Chase & Co.’s bond indexes tracking 41 countries in emerging markets that are benchmarks followed by some of the world’s biggest bond funds.

International investors hold $5 billion of rupee sovereign notes compared with $20.2 billion of overseas holdings in Indonesian rupiah government debt, government statistics show. Holdings of Brazil government domestic debt by foreign investors rose 9.5 percent in August to the equivalent of $9.2 billion.

“India isn’t a benchmark name,” said Lazlo Belgrado, who helps manage $800 million of emerging-market dollar bonds at KBC Asset Management SA in Luxembourg. “It isn’t a particularly strong credit within emerging markets, and you do have to deal with the cost of controls to invest locally there.”

Finance Secretary Ashok Chawla declined to comment yesterday in New Delhi when asked why the country isn’t selling debt denominated in dollars and euros.

Indian government bonds returned 0.7 percent last month, the fourth-best among 10 local-currency debt markets outside Japan, according to HSBC Holdings Plc indexes. The notes returned 3.8 percent this year.

India’s credit rating is BBB- at Standard & Poor’s and Baa3 at Moody’s Investors Service, on par with Brazil.

“There are other countries people can freely invest in and out, and can make money,” said Akira Takei, a fund manager in Tokyo at Mizuho Asset Management Co., which manages about $24 billion. “We don’t have to enter India’s debt market for now. Many investors probably take a wait-and-see stance.”